Why are some sureties better than others? Why can the small ones be harder to get than the big ones?
Construction companies are among the most important clients of a bail bond company. They are the source of the Compliance and Payment bonds that guarantee your construction contracts. For a surety (bond) company, these are probably the largest and most lucrative transactions. So why would the guarantee risk losing a customer by offering tough terms on an obviously small bonus?
There are many different types of bonds, and contractors may need a variety of them: bid bond, performance bond, payment bond, maintenance bond, license bond, permit bond, court bond, to name a few. In this article we will discuss why the big ones (big dollar amounts) may be easier to come by than the small ones, even for same applicant.
The answer to this question is found in the nature of the obligation, not the dollar amount. A good way to illustrate this is to compare a compliance bonus with a wage and welfare bonus.
Performance and payment bonds (P&P) refer to construction contracts. guarantee that the applicant to carry out the project in accordance with all aspects of the written contract, and they pay invoices corresponding to suppliers of labor and material.
Salary and Welfare Bonus
This type of bonus is required for union contractors (businesses that employ union workers). The W&W bond ensures that the construction company will pay the union wage rate as required and make the appropriate periodic contributions to union benefit plans such as pension and health. insurance program
It’s just not fair!
P&P bonds range in amount from a couple hundred thousand dollars to tens of millions, while a W&W bond is often under $100,000. So why might it be easier to get the big one? Why might it be easier to get a $500,000 performance bond than a $50,000 union bond?
The answer lies in the nature of the obligation and in the worst case scenarios.
Suppose the contractor goes out of business. With a performance bond, the surety is put in place of the contractor. They must make arrangements to complete the project in accordance with the contract. The performance bond beneficiary (also known as the obligor, the contract owner) continues to pay the remainder of the contract amount as the work progresses. Now they pay the bond by completing the termination. This is called the “unpaid contract amount.” Even if the contractor fails and you personally don’t have money, the unpaid amount of the contract is a resource that collateral can rely on and hopefully avoid a net loss on the claim.
The union bond is a promise of repay the funds at a future date. It is a financial surety – the toughest type of surety bond. Subscribers will search their crystal ball… Oh, sorry, we don’t have one.
The guarantee is to guarantee the future solvency of the construction company, not an easy task. And if they’re wrong, if the contractor can’t make his union payments because he doesn’t have any money, then there’s no money for the bond either.
Q. Who is likely to pay the wage and welfare claim?
A. The guarantee (a net loss)
It is the hard nature of some small bonuses (wage and welfare, bonus release, replacement) that makes them exceptionally difficult to obtain, often requiring full collateral. On the other hand, the guarantee can grant the same applicant a performance bond of $300,000 based mainly on their credit report.
Bottom line: it’s just not fair, but we never promised it would be, because the nature of the obligations differs. That is the deciding factor, even more so than the dollar amount of the bond.